Chapter 03 - Recommended Problems - Solutions.pdf - CHAPTER 03 7 a b RECOMMENDED PROBLEMS This statement confuses a shift of a curve with a movement

Chapter 03 - Recommended Problems - Solutions.pdf - CHAPTER...

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C HAPTER 03 R ECOMMENDED P ROBLEMS S OLUTIONS MGEA01 M ICHAEL H O F ALL 2014 7. a. This statement confuses a shift of a curve with a movement along a curve. A technological innovation lowers the cost of producing the good, leading producers to offer more of the good at any given price. This is represented by a rightward shift of the supply curve from to . As a result, the equilibrium price falls and the equilibrium quantity rises, as shown by the change from to . The statement “but a fall in price will increase demand for the good, and higher demand will send the price up again” is wrong for the following reasons. A fall in price does increase the quantity demanded and leads to an increase in the equilibrium quantity as one moves down along the demand curve. But it does not lead to an increase in demand a rightward shift of the demand curve and therefore does not cause the price to go up again. b. This statement also confuses a shift of a curve with a movement along a curve. The health report generates an increase in demand a rightward shift of the demand curve from to . This leads to a higher equilibrium price and quantity as we move up along the supply curve, and the equilibrium changes from to . The following statements are wrong: “Consumers, seeing that the price of garlic has gone up, reduce their demand for garlic. This causes the
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